Unit 2 Flashcards
When there is a market failure - who steps in?
Government reaction to market failure
Demand
Consumers try to maximize utility or maximize happiness. To do this, they will buy a certain amount of goods that bring them the highest level of utility.
Demand curve
a function that shows the quantity demanded at different prices (how much of a given good do consumers want to purchase at a certain price; how much they want to consume for that good); slope downward
Downward sloping demand
reason as prices fall, the amount the consumers demand increases (they want to buy more when the price goes down)
Example of demand curve
Which demand curve?
apples @ $5 = we buy 2.5 apples, @ $3 = we buy4 apples; apples are cheaper than oranges it makes senses that’s what I’ll spend my money on; shift away from oranges to apples because oranges are more expensive ( law of demand)
The Law of Demand
the idea that demand curves slope downward. As price goes up, demand goes down. Many public health interventions exploit this law.
Law of demand (as result of soda tax)
Soda tax means people have to give up more stuff to drink soda, therefore they consume less soda
Law of demand (as result of cigarette tax)
Because people have to give up more to consume a pack of cigarettes, they will likely consume less cigarettes (decrease the demand)
Shifts in demand curve (either inward or outward)
The demand curve shows how quantity demanded changes as the prices changes, holding other things constant (the market stays fixed). When those other things change, this causes the demand curve to _____
Factors that cause a shift in demand curve:
- Income
- Price of related good (substitutes + complements)
- Changes in consumer tastes or preferences
- Changes in population composition
- Changes in expectations about future prices or other factors that affect demand
supply
refers to the total amount of goods or services available to consumers
Law of supply
Upward sloping supply curve ;Supply curves are upward sloping because suppliers want to sell things for as much as they can.
Example of law of supply
the price of a good only changes the quantity supplied. Holding all else constant, at $3 an apple, a producer is willing to sell 2.5 apples, but when the price of an apple goes up to $6 an apple, the producer is willing to sell 5.5 apples. (the more apples you sell, you take more shelf space away from oranges and devote them to apples)
What factors cause shifts in the supply curve?
o Changes/New science and technology o Size of market o Government policies (taxes and subsidies) o Changes in price of relevant inputs o Seller expectations
Competitive Equilibrium
occurs when profit-maximizing producers and utility-maximizing consumers in competitive markets with freely determined prices arrive at an equilibrium price.
Equilibrium Price
the only price where the price is stable
Surplus of supply
incentive to lower price
Shortage of supply
• sellers have incentive to raise the price
the Equilibrium Point
The intersection of the demand curve and the supply curve; resting point or market point
Quantity supply = quantity demanded
*At this point, there is no reason for the market to deviate.
What does price signal about the product?
tells you how abundant or scare something is (important about how markets operate, when prices fall its telling the buyer that the good is more abundant, less scare so people buy more of it)
Price cap
example: you cant sell bread for more than $1 because its an essential source of nutrients for people) == supplies are trying to maximize their profits (and how it intersect with their supply curve. More people want bread then people who are selling it and this leads to a shortage (less people are getting break compared to when it was $2)
4 types of market failures
- equity
- lack of information
- externalities
- irrational consumers
Equity (as a market failure)
Market failure example: more money being spent on drugs that are for wealthier people and not others like drugs for tropical disease – government should intervene
Lack of information (as a market failure)
Market failure where demand curve is uninformed; doesn’t reflect what we should or should not know about something = lack on info leads to insufficient outcome
(Examples: misinformation about covid vaccine, window guards in NYC and passing letter grades for restaurant hygiene)
Externalities (as a market failure)
exist when there’s a transaction between 2 parties and a 3rd party is effected by that transaction; big role in how marketing functions
Example of externalities
- Example: air pollution : person bought car, store collected money but other people are effected by it (globally or in the air)
- Example: contagious diseases (covid) you make decisions about to purchase mask from store, and your decision effects other people because you are reducing the spread of covid (the market doesn’t account for this 3rd party being effected
- Example: deworming disease (slide 8), someone buying the drug for their child isn’t thinking about their child’s classmates. Study at schools for kids that got de-worming drugs vs. classmates that didn’t get the drugs; then compared those to schools where no one got the deworming drug
